The continuing popularity of special purpose acquisition company (SPAC) mergers is giving private company executives an attractive exit option. But whether going public using that fast-track approach is better than a traditional private equity (PE) buyout depends on what you want after the exit, specialists told CFO Dive.
A typical PE deal is driven by value-creation during the hold period, which can mean any number of things, depending on the investment strategy of the acquiring firm. It can mean the PE firm working hand-in-hand with the portfolio company team, offering up its expertise and resources and building long-term value, or it can mean cost-cutting or even an executive shake-up.
With SPACs, although there can be an executive shake-up, the sponsoring entity typically goes into the deal with the view the target company has the right leadership and business plan in place.
Staying private
There are benefits to going the PE route, UHY LLP partner Dan Jones said.
Increasingly, PE firms are opting for long-term investments that are not just financial in nature. To support their agenda of exiting after reaching higher valuations, they consult their in-house expertise for strategic inputs and directions. That input can help ensure the company’s growth and positive financial performance.
What’s more, from a post-transaction control perspective, depending on the acquiring firm’s strategy, PE funding allows executives of the portfolio company to retain control of operations. The leadership team can continue to remain involved in the company’s day-to-day operations and decision-making. It also allows them to continue following their business strategy more readily.
“[Avoiding] stock markets limits a company’s exposure to intense capital-market competition, enabling it to follow its strategic plans without the constant pressure to perform well financially to maintain its stock prices,” he said.
Another benefit: reducing the post-IPO’s additional administrative and compliance workload. Most small and mid-sized companies struggle to comply with rigorous reporting, governance, and controls that public companies need to follow post-IPO. Consequently, “the PE route is gaining popularity among such companies for funding of long- and short-term plans,” he said.
That said, PE deals can have drawbacks; they're potentially less profitable for the leadership team than a traditional IPO or SPAC transaction, and there’s often a smaller pool of buyers.
Going public
Although the SPAC market has cooled a bit, it remains an option of intense interest among operating company executives.
The second quarter of 2021 saw 59 SPAC IPOs, down considerably from a record-shattering 299 in the first quarter, according to an EY report.
The drop stems, in part, from concerns released earlier in the year by the Securities and Exchange Commission (SEC) over accounting and disclosure issues, which has slowed SPAC approvals and led to some re-thinking by both sponsors and operating companies.
Nonetheless, the manifold benefits of merging with a SPAC remain:
- It allows access to public markets.
- It leaves the task of raising capital to the sponsor.
- And there is the possibility of raising additional capital. SPAC sponsors will raise debt or private investment in public equity (PIPE) funding in addition to their original capital to not only fund the transaction, but also to fuel growth for the combined company. This backstop of debt and equity is intended to ensure a completed transaction even if some SPAC investors redeem their shares.
- It also allows access to operational expertise. SPAC sponsors often are experienced financial and industrial professionals. They can tap into their network of contacts to offer management expertise or take on a role on the board themselves.
- It's generally a shorter process than an IPO to go pbulic, a process that can be as short as three months in some cases, according to Scott Hendon, global and national leader of private equity practice at BDO USA. Additionally, SPAC transactions can be more lucrative for selling owners because they can benefit from the potential price-upside in public markets.
But it’s important for CFOs to understand the process and challenges of participating in a SPAC, which Hendon summarizes as early planning for IPO readiness. Requirements include having Sarbanes-Oxley disclosure control specialists in place, either on staff or outsourced, plus a recognition of the importance of investor relations.
Risk trade-off
SPACs aren’t a free ride, Jones and Hendon said. The leadership team of the operating company might lose its executive control and companies must comply with SEC rules and those of other regulators, something mid-cap companies struggle with, said Jones.
Another important factor: Unlike private companies, public companies must deal with stock prices that can reflect outside investors’ short-term focus. As a result, management will face constant pressure to perform well financially to maintain its stock prices. “If a company’s valuation drops due to its poor financial performance, with SPACs there is a greater chance of knee-jerk reactions or changes,” Jones said.